Petrobras Must Pay Brazil Another $6.8 Billion, a Credit Negative
Last Tuesday, the Brazilian government announced that Petróleo Brasileiro S.A. (Petrobras, Baa1
negative), the oil company majority-owned by the state, must pay an additional BRL15 billion ($6.8
billion) through 2018 for the right to expand oil production at certain prolific offshore formations.
The cash demand is credit negative for Petrobras because it will divert funds that the company needs for a
massive five-year capital spending program and further strain credit quality while leverage is already high.
The BRL15 billion in payments over the next four years equal the government’s BRL13 billion valuation of
the oil, plus a BRL2 billion signing bonus due this year.
Conselho Nacional de Political Energetica, Brazil’s national energy policy council, raised its payment
demand after Brazil’s national petroleum agency, the Agencia Nacional do Petroleo, Gas Natural e
Biocombustiveis (ANP), boosted its 2010 estimate of total proved undeveloped reserves at Petrobras’ four
pre-salt fields to a revised 15 billion barrels of oil equivalent (boe) from 5 billion boe. Petrobras in 2010
signed a transfer-of-rights agreement with the government in order to be the major producer at the four
pre-salt formations off Brazil’s coast.
Even before the upward estimate revision, the pre-salt formations had transformed Brazil into a major world
oil producer. However, the technical difficulty associated with production at these formations requires
Petrobras to invest heavily in development. The offshore fields’ depths average 7,000 meters, which
translate into high productions costs and significant operational risk. Petrobras has a capital spending
program that would require it to commit about $207 billion in 2014-18.
Although Petrobras can look forward to many additional years of earnings from oil produced at the pre-salt
formations, ANP’s higher estimates do not help the company’s annual cash flow, which will only rise
through higher production. Petrobras is highly leveraged today, with a reported debt/EBITDA ratio of 4x
and a debt/capitalization ratio of 39% as of March 2014. Both ratios are weaker than Petrobras’ targets of
2.5x debt/EBITDA and 35% debt/capitalization, and the added burden of cash payments to the
government, which controls 64% of Petrobras’ voting shares, will weaken these metrics further.
Petrobras has yet to disclose its estimates of recoverable oil volumes, costs, investments and the timetable of
production systems arising out of the surplus volumes. But any excess cash that Petrobras could have used
to fund its huge capital spending plans and reduce net borrowing will instead go toward paying for oil
reserves possibly years in advance of any profits the company might generate from sales.
Petrobras is an integrated petroleum company and the largest corporation in Brazil, with total assets of
$354 billion as of 31 March 2014. It dominates Brazil’s oil and natural gas production and downstream
refining and marketing. It also holds a significant stake in petrochemicals and a burgeoning position in
sugar-based ethanol production and distribution. The government directly and indirectly owns about 48%
of Petrobras’ common and preferred shares outstanding and 64% of its voting shares.
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